28/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from The Trading Room - 3.30pm
Across Asia, regional markets are all higher today as news of Canon forecasting the biggest profit increase in a decade, helped stocks bounce after eight straight losses. The Hang Seng is leading the way, up 1.7% while the Nikkei is stronger by 1.3% and the Kospi 1%. The Shanghai Composite is marginally higher, up 0.2%.
Turning our attention to the land down under and the Australia 200 CFD Index is 0.5% stronger at 4667, the high of the session. Surprisingly, against a backdrop of negative sentiment it’s the cyclical sectors adding most of the points today, with the defensives coming under pressure, reversing what we have seen in recent days.
Today’s materials outperformance flies in the face of negative overnight leads. This could mark an inflection point for sentiment as market participants begin to see the recent sell-off as overdone.
After eight straight falls, it appears investors may be seeing a near term bottom and are happy to add high quality names at low risk entry prices.
Financials have bounced strongly after the late session rally in their US counterparts, which is an encouraging sign given the recent turmoil following Obama’s proposed prop trading plans.
It seems US markets saw the latest FOMC minutes as largely positive. This pickup in sentiment is boosting markets globally.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4656 (0.3%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Property Trusts | 1.5% | Consumer Staples | -1.3% | |
| Materials | 0.5% | Healthcare | -0.6% | |
| Financials | 0.5% | Consumer Discretionary | -0.6% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Westfield Group | 3.6 | Woolworths | -3.6 | |
| Commonwealth Bank of Australia | 2.8 | QBE Insurance Group | -1.0 | |
| BHP Billiton | 2.7 | CSL | -1.0 |
AUD/USD – In a note from NAB FX strategist John Kyriakopoulos, he said the AUD/USD is neither cheap nor expensive right now, but given losses over the last week were driven by risk aversion, any mood upswing would mean the pair could gain rapidly in the days ahead. He believes any calming of fears of a sharp slowdown in Chinese economic growth could see the AUD/USD rebound sharply, although the fact it's not cheap relative to our model's "fair value" estimate, suggests a more modest recovery is most likely.
Copper – In a technical note from Barclays Capital, London Metals Exchange copper broke sharply to the downside overnight, contrary to expectations "taking out Barclays $7,150/ton stop and forcing Barclays out of the long copper position" recommended in a recent Technical Trade note. The broker said while prices ultimately recovered back above the $7,170 support zone to close at $7,230, the strength of the decline suggests a more choppy, prolonged correction than previously estimated. They are now focusing on the 11-month channel and 50-day average at $7,107-$7,050. Here, the larger bull trend remains intact, but bulls need a closing break of $7,511; the 3-week flag resistance to indicate that the bull trend has resumed.
Westfield Group – In a note from JPMorgan, Westfield Group was upgraded to ‘overweight’ from ‘neutral’ after a tour of 8 Australian malls slated for redevelopment drove a reassessment of value of the development pipeline and underpinned a 13% increase in its target price to $14.35 from $12.72. The broker said the centres were heaving, with no evidence of vacancy levels, suggesting strong opportunities to add expansion space in both near- and medium-term. This is in contrast to Westfield's US and UK malls, where expansion isn't expected until 2012.
Newcrest Mining – Newcrest Mining posted a healthy-looking 2Q production report this morning, with gold and copper production rising and costs sharply lower. Gold production was up 16% on year to 442,333 ounces; they maintained FY guidance at 1.81 million-1.91 million ounces. 2Q copper output was up 12% on year to 23,860 metric tons; they upped FY guidance range to 85,000-90,000 tons. Gross cash costs fell 44% on year to $3.10 per ounce, partly driven by higher by product credits as copper output and prices rose but also on cost saving measures and an increase in ore inventory at Cadia in 1Q.
Earnings recovery – In a strategy report from UBS, despite the recent spike in risk aversion, they expect further evidence of an earnings recovery to drive Australian shares higher. The broker believes market p/e's look attractive, based on the likely degree of earnings rebound over 2010 and 2011. They maintain their ‘overweight’ rating on banking and mining sectors, with upside risk to consensus estimates foreseen. In non-financial industrials, they feel earnings momentum favours cyclicals, though valuations for defensives look appealing. Hence, UBS has media as its key ‘overweight’ within the industrial sector as it offers both value and earnings upside risk. They added ASX, Bendigo & Adelaide Bank, Incitec Pivot, OneSteel, Stockland to their model portfolio and removed Bluescope, Dexus and Foster's Group.
Murchison Metals – In a broker report from UBS, its target price was upped to $2.75 from $2.10 due to progress on expansion of its Jack Hills mine and Oakajee port and rail project; this being a key driver for the stock. Murchison aims to finish bankable feasibility studies on the port and mining operations by end-3Q10 and UBS believes this should then trigger capacity payment by partner Mitsubishi for 50% equity in the project. The broker said production and shipments in FY 2Q were ahead of their forecasts and the product mix was also positive. They maintained their ‘buy’ rating.
Overnight Market Report - 9.15am
In the US overnight, stocks rose late in the session after the Federal Reserve pledged to keep interest rates low. Earlier, worse-than-expected new home sales numbers and a large fall in Crude Oil inventories had triggered market weakness.
The Nasdaq was the best performing index, finishing the session 0.8% higher. The S&P 500 added 0.5% to finish at 1098, while the Dow Jones Industrial Average gained 0.4%.
Gains in the early part of the year indicated participants were very optimistic. The last ten days trade seems to have bought people back to earth, with a real mix of political and economic factors dragging the market lower. Confidence and sentiment have certainly turned, so we will need to see this recover before the market stabilises. At this point, the correction looks pretty healthy in our eyes.
In Australia, the SPI futures are calling the Australia 200 CFD Index 0.2% lower at 4639 despite the positive closes on Wall St.
Once again, the materials sector is likely to come under pressure today as weak leads continue on the back of concerns over Chinese growth. Base metals were all lower in London, as were Rio Tinto (-1.7%) and BHP Billiton (-0.4%). The S&P Materials sector in the US was the biggest loser, down 0.9%.
Another 1.4% fall in Crude Oil futures overnight will likely weigh on the energy sector.
However, on a positive note we might see some strength among financials, helping to offset materials stocks. After its recent weakness, the S&P Financial sector was the best performer in the US, rising 2.4% as investors were relieved there were no surprises in the FOMC statement.
At 1pm today, President Obama will be delivering his inaugural State of the Union speech. Markets globally will be looking for any market moving comments.
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